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Friday, February 5, 2010

The Coming Small Business Bubble?

The situation seems eerily familiar. Our economy is weak. Money is cheap, and loan standards are then loosening.

President Barack Obama is asking Congress to extend the provisions that helped revive U.S. Small Business Administration lending this year.

The economic stimulus bill provided the SBA with $375 million to increase the loanguarantee on the agency’s flagship 7(a) business loans to 90 percent, and to reduce or eliminate fees on 7(a) loans and 504 loans, which primarily finance real estate. The higher guarantee brought more than 1,000 lenders back to the SBA’s loan programs, and the lower fees made the loans more affordable to borrowers.

Thanks to these enhancements, SBA lending hit a record high in November.

That was the set up for the real estate boom, bubble, and bust. Our economy was weak. The Fed made money cheap. Banks began to extend mortgage terms to levels never seen before.

What do we have now? Our economy is weak. The Fed Funds Rate is zero and now President Obama has designed a plan so that small businesses will get loans at loan to values and sizes never seen before.

I have been forecasting the creation of a bubble in the economy since Bernanke lowered the Fed Funds Rate to zero. That's no especially astute analysis. Cheap money creates an artificial stimulus to spend and invest. Banks had a lot of cheap money in 2002-2003. They needed a place to put it and they found one in sub prime.

The same is true now only now the administration is determined to make as much of the final place small business loans. That's a set up for a small business loan bubble.

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